The State of Cleantech Entrepreneurship in 2014

Rob Day: June 17, 2014, 1:25 PM

As the time approaches to get serious about NextWave14 (coming up in just a few weeks!), I thought it would be a good time to take a step back and review how the overall "sector" is doing right now. And by and large, it's a happy picture.

The markets are booming

I put "sector" in quotation marks above because we all know that this is really a collection of a wide variety of markets and applications gathered under a consistent investment thesis. Cleantech isn't a sector; it's a lens for finding big opportunities across sectors.

But across many of those markets right now, we're seeing amazing growth continue.

The big corporates are jumping in

From fuels to smart buildings to storage to transportation, there's never been more serious corporate interest in the next wave of technologies and business models.

As I recently pointed out, a large proportion of the growth-stage cleantech venture deals now being done include -- and sometimes are even led by -- corporate investors. Anecdotally, I've seen a surge in proactive outreach from corporate strategy groups and business unit leaders to the startups I work with on a regular basis.

Even more exciting, at least to me, is seeing some of these big companies start to redefine the markets they're in and gear up for emerging market battles that once would never have been dreamed of.

David Crane declaring that NRG is heading "down the path toward a distributed-generation-centric, clean energy future featuring individual choice and the empowerment of the American energy consumer"

And encouragingly, the big "cleantech giants" like First Solar, Tesla and SolarCity are themselves partnering, opening up new markets and making acquisitions. Our sector is no longer dependent solely upon outside/incumbent big companies "waking up" to the opportunities in the space.

This sector is totally sidelined right now by the venture investor community. But that's got to be temporary, an aversion based upon labels more than market reality. There's no way so many smart investors will continue to pass up on the growth opportunities so obviously illustrated above. What's needed to bring back early- and growth-stage capital is a stronger pattern of exits.

Besides IPOs, acquisition activity is also heating up. The most obvious example is Nest, but others include ecoATM, Climate Corp., Novaled, Silevo, Zep, and many others. We're starting to see acquisitions as corporations pursue the expansion strategies described above. And even more encouraging, we're starting to see strategy-driven (as opposed to opportunistic) vertical and horizontal consolidation in areas like solar and water.

But while state-level policy battles on cleantech are a mixed bag right now, there are encouraging signs of solutions going forward. Massachusetts just demonstrated how utilities and solar companies can collaborate for a win-win solution, for instance. California's encouragement is providing a great early entry point for energy storage innovations, and New York and Connecticut are two other states where smart policies are providing cost-effective encouragement of cleantech adoption.

And this isn't strictly a "red state/blue state" thing. Polls consistently show that voters in all states want more access to distributed, clean energy and energy efficiency. So pragmatic state-level leaders across parties are figuring out ways to promote this access, some more quietly than others. It's not a unanimous trend, but it's a clear trend at the state level.

The startups are stronger than ever

Most importantly, five years after a major economic downturn that put the sector on its heels, the cleantech startups that survived are now quietly doing quite well indeed. I can observe this firsthand in our own portfolio, where revenues across the companies we work with continue to grow quickly. And because my firm also at times acts as a limited partner, I can see it in other investors' portfolios as well.

Many startups that survived through lean times are now poised for growth. And startups that were better positioned because of lower capital burn, or launched after the lean times with smarter business models, are doing quite well indeed. Cleantech startups are healthier than ever.

We're seeing a widespread adoption now of business model innovation entrepreneurship in this sector: new service models; downstream startups taking advantage of all of the cost declines upstream; and new financial-based models that profitably merge new innovations with project finance, where there's deep appetite right now for yield. Cleantech startup models are smarter than ever.

And for those startups fortunate enough to be backed by deep-pocketed and dedicated investors, there's a lot of expansion opportunity in such fast-growing markets. When I talk with entrepreneurs in the sector these days, they're often no longer "playing defense." They're hungry to grab the opportunities they see in front of them. Cleantech startups are more aggressive than ever.

In short, there's a lot to be excited about right now in cleantech entrepreneurship. The state of the sector is mixed, mostly because the investors are slow on the uptake. But everyone else can see quite clearly that the next wave is here. When the capital does inevitably come back, this sector (however it's labeled) is poised to take off.

Looking forward to talking about this with you, and hearing a lot more success stories, at NextWave14!

Latest Update: Yesterday 8:00 AM

About Cleantech Investing:

Rob Day is a Partner with Black Coral Capital, based in Boston. He has been a cleantech private equity investor since 2004, and acts or has served as a Director, Observer and advisory board member to multiple companies in the energy tech and related sectors. The views expressed on this blog are those of Rob, not necessarily the views of any of his colleagues and affiliated organizations. Contact Rob at .(JavaScript must be enabled to view this email address).

contact rob at .(JavaScript must be enabled to view this email address)